QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

Commission file number: 001-09383

WESTAMERICA BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

CALIFORNIA

94-2156203

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

1108 FIFTH AVENUE, SAN RAFAEL, CALIFORNIA 94901

(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code (707) 863-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒

No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒

No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐

No ☒

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

This report on Form 10-Q contains forward-looking statements about Westamerica Bancorporation (the “Company”) for which it claims the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, future credit quality and performance, the appropriateness of the allowance for loan losses, loan growth or reduction, mitigation of risk in the Company’s loan and investment securities portfolios, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or board of directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", “estimates”, "intends", "targeted", "projected", “forecast”, "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

These forward-looking statements are based on Management’s current knowledge and belief and include information concerning the Company’s possible or assumed future financial condition and results of operations. A number of factors, some of which are beyond the Company’s ability to predict or control, could cause future results to differ materially from those contemplated. These factors include but are not limited to (1) the length and severity of difficulties in the global, national and California economies and the effects of government efforts to address those difficulties; (2) liquidity levels in capital markets; (3) fluctuations in asset prices including, but not limited to stocks, bonds, real estate, and commodities; (4) the effect of acquisitions and integration of acquired businesses; (5) economic uncertainty created by terrorist threats and attacks on the United States, the actions taken in response, and the uncertain effect of these events on the national and regional economies; (6) changes in the interest rate environment; (7) changes in the regulatory environment; (8) competitive pressure in the banking industry; (9) operational risks including a failure or breach in data processing or security systems or those of third party vendors and other service providers, including as a result of cyber attacks or fraud; (10) volatility of interest rate sensitive loans, deposits and investments; (11) asset/liability management risks and liquidity risks; (12) the effect of natural disasters, including earthquakes, fire, flood, drought, and other disasters, on the uninsured value of the Company’s assets and of loan collateral, the financial condition of debtors and issuers of investment securities, the economic conditions affecting the Company’s market place, and commodities and asset values; (13) changes in the securities markets and (14) the outcome of contingencies, such as legal proceedings. However, the reader should not consider the above-mentioned factors to be a complete set of all potential risks or uncertainties.

Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to update any forward-looking statements in this Report to reflect circumstances or events that occur after the date forward looking statements are made, except as may be required by law. The reader is directed to the Company's annual report on Form 10-K for the year ended December 31, 2016, for further discussion of factors which could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report.

- 3 -

PART I - FINANCIAL INFORMATION

Item 1Financial Statements

WESTAMERICA BANCORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

At September 30,

At December 31,

2017

2016

(In thousands)

Assets:

Cash and due from banks

$

561,757

$

462,271

Investment securities available for sale

2,090,477

1,890,758

Investment securities held to maturity, with fair values of: $1,208,279 at September 30, 2017 and $1,340,741 at December 31, 2016

1,204,240

1,346,312

Loans

1,284,782

1,352,711

Allowance for loan losses

(23,628

)

(25,954

)

Loans, net of allowance for loan losses

1,261,154

1,326,757

Other real estate owned

1,426

3,095

Premises and equipment, net

35,507

36,566

Identifiable intangibles, net

4,605

6,927

Goodwill

121,673

121,673

Other assets

164,969

171,724

Total Assets

$

5,445,808

$

5,366,083

Liabilities:

Noninterest-bearing deposits

$

2,128,342

$

2,089,443

Interest-bearing deposits

2,606,238

2,615,298

Total deposits

4,734,580

4,704,741

Short-term borrowed funds

66,337

59,078

Other liabilities

40,934

40,897

Total Liabilities

4,841,851

4,804,716

Contingencies (Note 10)

Shareholders' Equity:

Common stock (no par value), authorized - 150,000 shares Issued and outstanding: 26,319 at September 30, 2017 and 25,907 at December 31, 2016

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Note 2: Accounting Policies

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses is included in the “Provision for Loan Losses,” “Loan Portfolio Credit Risk” and “Allowance for Loan Losses” discussion below. Certain amounts in prior periods have been reclassified to conform to the current presentation.

Application of these principles requires the Company to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

Recently Adopted Accounting Standards

FASB Accounting Standards Update (ASU) 2016-09,Improvements to Employee Share-Based Payment Accounting, was issued March 30, 2016. The provisions of the new standard changes several aspects of the accounting for share-based payment award transactions, including: (1) Accounting and Cash Flow Classification for Excess Tax Benefits, (2) Forfeitures, and (3) Tax Withholding Requirements and Cash Flow Classification. The Company adopted the ASU provisions effective January 1, 2017, which has the potential to create volatility in the book tax provision at the time nonqualified stock options are exercised or expire. During the first nine months of 2017, 403 thousand shares were issued due to the exercise of nonqualified stock options resulting in a tax deduction exceeding related share based compensation by $1.6 million. The first nine months of 2017 income tax provision was $688 thousand lower than would have been under accounting standards prior to the adoption of ASU 2016-09. The Company elected to account for forfeitures as they occur.

Recently Issued Accounting Standards

FASB ASU 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers, was issued May 2014. The ASU specifies a standardized approach for revenue recognition across industries and transactions. The scope of the ASU does not include revenue streams covered by other ASU topics; thus, Topic 606 does not apply to revenue related to financial instruments, guarantees and leases, such as the Company’s net interest income.

- 9 -

Approximately 73% of our revenue, including all of our net interest income and a portion of our noninterest income, is out of scope of the guidance. The contracts that are in scope of the guidance are primarily related to service charges and fees on deposit accounts, merchant processing fees, trust fees and other service charges, commissions and fees. We have created an implementation team that is analyzing the individual contracts in scope to determine if our current accounting will change. This review is expected be completed in the fourth quarter of 2017.

The Company will be required to adopt the ASU on January 1, 2018. The Company intends to adopt the accounting standard during the first quarter of 2018, as required. The Company has not yet selected a transition method. The Company’s preliminary analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, was issued January 2016. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

The Company will be required to adopt the ASU provisions on January 1, 2018, and for those equity securities with readily determinable fair values, the Company plans to elect the retrospective transition approach with a cumulative effect adjustment to the balance sheet and for those equity securities that do not have readily determinable fair values, the Company plans to elect the prospective transition approach. The adoption of this accounting standard on the Company’s consolidated financial statements will be subject to the price volatility of the equity investments.

FASB ASU 2016-02,Leases (Topic 842), was issued February 25, 2016. The provisions of the new standard require lessees to recognize most leases on-balance sheet, increasing reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP.

The Company will be required to adopt the ASU provisions January 1, 2019, and plans to elect the modified retrospective transition approach. Management is evaluating the impact that the ASU will have on the Company’s financial statements. As of December 31, 2016, the Company leased 61 of its operating facilities; the remaining minimum lease payments were $20.8 million. The Company does not expect a material change in noninterest expenses upon adoption of the new standard.

FASB ASU 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, was issued on June 16, 2016. The ASU significantly changes estimates for credit losses related to financial assets measured at amortized cost and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with the current expected credit loss (CECL) model, which will accelerate recognition of credit losses. Additionally, credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses under the new standard. The Company will also be required to provide additional disclosures related to the financial assets within the scope of the new standard.

The Company will be required to adopt the ASU provisions on January 1, 2020. Management is evaluating the impact that the ASU will have on the Company’s consolidated financial statements. The ultimate adjustment to the allowance for loan losses will be accomplished through an offsetting after-tax adjustment to shareholders’ equity. Management expects the Company and the Bank to meet all regulatory capital adequacy requirements to which they are subject following adoption of the new standard. Economic conditions and the composition of the Company’s loan portfolio at the time of adoption will influence the extent of the adopting accounting adjustment.

FASB ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, was issued March 2017. The ASU will shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

The Company will be required to adopt the ASU provisions on January 1, 2019. Management is evaluating the impact the ASU will have on the Company’s financial statements.

- 10 -

Note 3: Investment Securities

An analysis of the amortized cost, gross unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio follows:

Investment Securities Available for Sale

At September 30, 2017

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(In thousands)

Securities of U.S. Government sponsored entities

$

122,280

$

19

$

(1,840

)

$

120,459

Agency residential mortgage-backed securities (MBS)

754,138

1,091

(16,011

)

739,218

Non-agency residential MBS

164

1

-

165

Agency commercial MBS

1,916

-

(14

)

1,902

Securities of U.S. Government entities

1,783

-

(14

)

1,769

Obligations of states and political subdivisions

176,182

4,929

(1,610

)

179,501

FHLMC(1) and FNMA(2) stock

749

8,811

-

9,560

Corporate securities

1,037,173

2,943

(4,027

)

1,036,089

Other securities

2,000

-

(186

)

1,814

Total

$

2,096,385

$

17,794

$

(23,702

)

$

2,090,477

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

An analysis of the amortized cost, gross unrecognized gains and losses, and fair value of the held to maturity investment securities portfolio follows:

Investment Securities Held to Maturity

At September 30, 2017

Gross

Gross

Amortized

Unrecognized

Unrecognized

Fair

Cost

Gains

Losses

Value

(In thousands)

Agency residential MBS

$

574,017

$

949

$

(6,802

)

$

568,164

Non-agency residential MBS

4,628

67

-

4,695

Agency commercial MBS

9,114

1

(82

)

9,033

Obligations of states and political subdivisions

616,481

10,999

(1,093

)

626,387

Total

$

1,204,240

$

12,016

$

(7,977

)

$

1,208,279

[The remainder of this page intentionally left blank]

- 11 -

An analysis of the amortized cost, gross unrealized gains and losses accumulated in other comprehensive income, and fair value of the available for sale investment securities portfolio follows:

Investment Securities Available for Sale

At December 31, 2016

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

(In thousands)

Securities of U.S. Government sponsored entities

$

141,599

$

35

$

(2,974

)

$

138,660

Agency residential MBS

711,623

921

(21,045

)

691,499

Non-agency residential MBS

272

-

(1

)

271

Securities of U.S. Government entities

2,041

-

(16

)

2,025

Obligations of states and political subdivisions

182,230

5,107

(3,926

)

183,411

Asset-backed securities

696

-

(1

)

695

FHLMC(1) and FNMA(2) stock

749

10,120

-

10,869

Corporate securities

866,835

1,690

(7,668

)

860,857

Other securities

2,034

621

(184

)

2,471

Total

$

1,908,079

$

18,494

$

(35,815

)

$

1,890,758

(1) Federal Home Loan Mortgage Corporation

(2) Federal National Mortgage Association

An analysis of the amortized cost, gross unrecognized gains and losses, and fair value of the held to maturity investment securities portfolio follows:

Investment Securities Held to Maturity

At December 31, 2016

Gross

Gross

Amortized

Unrecognized

Unrecognized

Fair

Cost

Gains

Losses

Value

(In thousands)

Securities of U.S. Government sponsored entities

$

581

$

1

$

-

$

582

Agency residential MBS

668,235

1,122

(8,602

)

660,755

Non-agency residential MBS

5,370

76

-

5,446

Agency commercial MBS

9,332

11

(143

)

9,200

Obligations of states and political subdivisions

662,794

6,031

(4,067

)

664,758

Total

$

1,346,312

$

7,241

$

(12,812

)

$

1,340,741

The amortized cost and fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated:

At September 30, 2017

Securities Available

Securities Held

for Sale

to Maturity

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

(In thousands)

Maturity in years:

1 year or less

$

208,391

$

208,764

$

37,548

$

38,399

Over 1 to 5 years

861,895

860,966

278,240

281,577

Over 5 to 10 years

219,648

221,949

290,869

296,357

Over 10 years

45,701

44,370

9,824

10,054

Subtotal

1,335,635

1,336,049

616,481

626,387

MBS

758,001

743,054

587,759

581,892

Other securities

2,749

11,374

-

-

Total

$

2,096,385

$

2,090,477

$

1,204,240

$

1,208,279

- 12 -

At December 31, 2016

Securities Available

Securities Held

for Sale

to Maturity

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

(In thousands)

Maturity in years:

1 year or less

$

154,693

$

154,835

$

14,961

$

15,639

Over 1 to 5 years

750,834

745,219

292,024

292,062

Over 5 to 10 years

238,077

239,153

318,580

319,587

Over 10 years

47,756

44,416

37,810

38,052

Subtotal

1,191,360

1,183,623

663,375

665,340

MBS

713,936

693,795

682,937

675,401

Other securities

2,783

13,340

-

-

Total

$

1,908,079

$

1,890,758

$

1,346,312

$

1,340,741

Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. At September 30, 2017 and December 31, 2016, the Company had no high-risk collateralized mortgage obligations as defined by regulatory guidelines.

An analysis of the gross unrealized losses of the available for sale investment securities portfolio follows:

Investment Securities Available for Sale

At September 30, 2017

No. of

Less than 12 months

No. of

12 months or longer

No. of

Total

Investment

Unrealized

Investment

Unrealized

Investment

Unrealized

Positions

Fair Value

Losses

Positions

Fair Value

Losses

Positions

Fair Value

Losses

($ in thousands)

Securities of U.S. Government sponsored entities

6

$

89,046

$

(1,169

)

2

$

29,328

$

(671

)

8

$

118,374

$

(1,840

)

Agency residential MBS

15

336,023

(8,283

)

37

202,746

(7,728

)

52

538,769

(16,011

)

Non-agency residential MBS

1

6

-

-

-

-

1

6

-

Agency commercial MBS

1

1,902

(14

)

-

-

-

1

1,902

(14

)

Securities of U.S. Government entities

1

896

(6

)

2

873

(8

)

3

1,769

(14

)

Obligations of states and political subdivisions

35

28,910

(592

)

24

35,329

(1,018

)

59

64,239

(1,610

)

Corporate securities

36

299,545

(1,672

)

26

166,386

(2,355

)

62

465,931

(4,027

)

Other securities

-

-

-

1

1,814

(186

)

1

1,814

(186

)

Total

95

$

756,328

$

(11,736

)

92

$

436,476

$

(11,966

)

187

$

1,192,804

$

(23,702

)

An analysis of gross unrecognized losses of the held to maturity investment securities portfolio follows:

Investment Securities Held to Maturity

At September 30, 2017

No. of

Less than 12 months

No. of

12 months or longer

No. of

Total

Investment

Unrecognized

Investment

Unrecognized

Investment

Unrecognized

Positions

Fair Value

Losses

Positions

Fair Value

Losses

Positions

Fair Value

Losses

($ in thousands)

Agency residential MBS

64

$

494,096

$

(6,320

)

8

$

19,092

$

(482

)

72

$

513,188

$

(6,802

)

Agency commercial MBS

-

-

-

1

7,101

(82

)

1

7,101

(82

)

Obligations of states and political subdivisions

42

40,023

(417

)

26

27,693

(676

)

68

67,716

(1,093

)

Total

106

$

534,119

$

(6,737

)

35

$

53,886

$

(1,240

)

141

$

588,005

$

(7,977

)

- 13 -

The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company evaluates securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. Substantially all of these securities continue to be investment grade rated by a major rating agency. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.

The Company does not intend to sell any investments and has concluded that it is more likely than not that it will not be required to sell the investments prior to recovery of the amortized cost basis. Therefore, the Company does not consider these investments to be other-than-temporarily impaired as of September 30, 2017.

The fair values of the investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines. As a result, other than temporary impairments may occur in the future.

As of September 30, 2017, $771,257 thousand of investment securities were pledged to secure public deposits and short-term borrowed funds. As of December 31, 2016, $768,845 thousand of investment securities were pledged to secure public deposits and short-term borrowed funds.

An analysis of gross unrealized losses of investment securities available for sale follows:

Investment Securities Available for Sale

At December 31, 2016

No. of

Less than 12 months

No. of

12 months or longer

No. of

Total

Investment

Unrealized

Investment

Unrealized

Investment

Unrealized

Positions

Fair Value

Losses

Positions

Fair Value

Losses

Positions

Fair Value

Losses

($ in thousands)

Securities of U.S. Government sponsored entities

8

$

117,227

$

(2,974

)

-

$

-

$

-

8

$

117,227

$

(2,974

)

Agency residential MBS

21

524,269

(16,494

)

28

122,901

(4,551

)

49

647,170

(21,045

)

Non-agency residential MBS

2

246

(1

)

-

-

-

2

246

(1

)

Securities of U.S. Government entities

2

1,253

(9

)

1

772

(7

)

3

2,025

(16

)

Obligations of states and political subdivisions

43

57,989

(3,905

)

3

1,117

(21

)

46

59,106

(3,926

)

Asset-backed securities

-

-

-

1

695

(1

)

1

695

(1

)

Corporate securities

53

385,175

(6,551

)

27

96,145

(1,117

)

80

481,320

(7,668

)

Other securities

-

-

-

1

1,816

(184

)

1

1,816

(184

)

Total

129

$

1,086,159

$

(29,934

)

61

$

223,446

$

(5,881

)

190

$

1,309,605

$

(35,815

)

An analysis of gross unrecognized losses of investment securities held to maturity follows:

Investment Securities Held to Maturity

At December 31, 2016

No. of

Less than 12 months

No. of

12 months or longer

No. of

Total

Investment

Unrecognized

Investment

Unrecognized

Investment

Unrecognized

Positions

Fair Value

Losses

Positions

Fair Value

Losses

Positions

Fair Value

Losses

($ in thousands)

Agency residential MBS

66

$

569,876

$

(8,285

)

3

$

10,480

$

(317

)

69

$

580,356

$

(8,602

)

Agency commercial MBS

-

-

-

1

7,214

(143

)

1

7,214

(143

)

Obligations of states and political subdivisions

295

272,496

(3,710

)

12

13,126

(357

)

307

285,622

(4,067

)

Total

361

$

842,372

$

(11,995

)

16

$

30,820

$

(817

)

377

$

873,192

$

(12,812

)

- 14 -

The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax:

For the Three Months

For the Nine Months

Ended September 30,

2017

2016

2017

2016

(In thousands)

Taxable

$

12,957

$

11,024

$

37,584

$

31,256

Tax-exempt from regular federal income tax

5,106

5,476

15,718

16,682

Total interest income from investment securities

$

18,063

$

16,500

$

53,302

$

47,938

Note 4: Loans and Allowance for Loan Losses

A summary of the major categories of loans outstanding is shown in the following tables at the dates indicated.

At September 30, 2017

At December 31, 2016

(In thousands)

Commercial

$

316,891

$

354,697

Commercial Real Estate

573,717

542,171

Construction

4,992

2,555

Residential Real Estate

69,124

87,724

Consumer Installment & Other

320,058

365,564

Total

$

1,284,782

$

1,352,711

Total loans outstanding reported above include loans purchased from the FDIC of $90,708 thousand and $121,210 thousand at September 30, 2017 and December 31, 2016, respectively. Loans purchased from the FDIC were separately reported in prior periods and have been reclassified into their respective categories in the current presentation.

Changes in the accretable yield for purchased loans were as follows:

For the

For the

Nine Months Ended

Year Ended

September 30, 2017

December 31, 2016

Accretable yield:

(In thousands)

Balance at the beginning of the period

$

1,237

$

1,259

Reclassification from nonaccretable difference

1,504

3,912

Accretion

(1,862

)

(3,934

)

Balance at the end of the period

$

879

$

1,237

Accretion

$

(1,862

)

$

(3,934

)

Change in FDIC indemnification

192

1,053

(Increase) in interest income

$

(1,670

)

$

(2,881

)

The following summarizes activity in the allowance for loan losses:

Allowance for Loan Losses

For the Three Months Ended September 30, 2017

Consumer

Commercial

Residential

Installment

Commercial

Real Estate

Construction

Real Estate

and Other

Unallocated

Total

(In thousands)

Allowance for loan losses:

Balance at beginning of period

$

8,167

$

3,545

$

160

$

1,105

$

7,215

$

3,911

$

24,103

Additions:

(Reversal) provision

(391

)

288

136

(50

)

167

(150

)

-

Deductions:

Chargeoffs

(132

)

-

-

-

(886

)

-

(1,018

)

Recoveries

128

-

-

-

415

-

543

Net loan losses

(4

)

-

-

-

(471

)

-

(475

)

Total allowance for loan losses

$

7,772

$

3,833

$

296

$

1,055

$

6,911

$

3,761

$

23,628

- 15 -

Allowance for Loan Losses

For the Nine Months Ended September 30, 2017

Consumer

Commercial

Residential

Installment

Commercial

Real Estate

Construction

Real Estate

and Other

Unallocated

Total

(In thousands)

Allowance for loan losses:

Balance at beginning of period

$

8,327

$

3,330

$

152

$

1,330

$

7,980

$

4,835

$

25,954

Additions:

(Reversal) provision

(220

)

415

(1,755

)

(275

)

1,009

(1,074

)

(1,900

)

Deductions:

Chargeoffs

(961

)

-

-

-

(3,783

)

-

(4,744

)

Recoveries

626

88

1,899

-

1,705

-

4,318

Net loan (losses) recoveries

(335

)

88

1,899

-

(2,078

)

-

(426

)

Total allowance for loan losses

$

7,772

$

3,833

$

296

$

1,055

$

6,911

$

3,761

$

23,628

Allowance for Loan Losses

For the Three Months Ended September 30, 2016

Consumer

Commercial

Residential

Installment

Commercial

Real Estate

Construction

Real Estate

and Other

Unallocated

Total

(In thousands)

Allowance for loan losses:

Balance at beginning of period

$

10,402

$

3,912

$

167

$

1,636

$

7,651

$

5,142

$

28,910

Additions:

(Reversal) provision

(3,642

)

(822

)

(22

)

(193

)

1,777

(298

)

(3,200

)

Deductions:

Chargeoffs

(88

)

-

-

-

(1,848

)

-

(1,936

)

Recoveries

1,739

509

-

-

337

-

2,585

Net loan recoveries (losses)

1,651

509

-

-

(1,511

)

-

649

Total allowance for loan losses

$

8,411

$

3,599

$

145

$

1,443

$

7,917

$

4,844

$

26,359

Allowance for Loan Losses

For the Nine Months Ended September 30, 2016

Consumer

Commercial

Residential

Installment

Commercial

Real Estate

Construction

Real Estate

and Other

Unallocated

Total

(In thousands)

Allowance for loan losses:

Balance at beginning of period

$

9,559

$

4,212

$

235

$

1,801

$

8,001

$

5,963

$

29,771

Additions:

(Reversal) provision

(2,827

)

(1,152

)

(90

)

(358

)

2,346

(1,119

)

(3,200

)

Deductions:

Chargeoffs

(2,024

)

-

-

-

(3,568

)

-

(5,592

)

Recoveries

3,703

539

-

-

1,138

-

5,380

Net loan recoveries (losses)

1,679

539

-

-

(2,430

)

-

(212

)

Total allowance for loan losses

$

8,411

$

3,599

$

145

$

1,443

$

7,917

$

4,844

$

26,359

The allowance for loan losses and recorded investment in loans evaluated for impairment were as follows:

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

At September 30, 2017

Commercial

Commercial Real Estate

Construction

Residential Real Estate

Consumer Installment and Other

Unallocated

Total

(In thousands)

Allowance for loan losses:

Individually evaluated for impairment

$

4,922

$

154

$

-

$

-

$

-

$

-

$

5,076

Collectively evaluated for impairment

2,850

3,679

296

1,055

6,911

3,761

18,552

Purchased loans with evidence of credit deterioration

-

-

-

-

-

-

-

Total

$

7,772

$

3,833

$

296

$

1,055

$

6,911

$

3,761

$

23,628

Carrying value of loans:

Individually evaluated for impairment

$

10,749

$

13,973

$

-

$

211

$

-

$

-

$

24,933

Collectively evaluated for impairment

306,113

559,182

4,992

68,913

319,889

-

1,259,089

Purchased loans with evidence of credit deterioration

29

562

-

-

169

-

760

Total

$

316,891

$

573,717

$

4,992

$

69,124

$

320,058

$

-

$

1,284,782

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- 16 -

Allowance for Loan Losses and Recorded Investment in Loans Evaluated for Impairment

At December 31, 2016

Commercial

Commercial Real Estate

Construction

Residential Real Estate

Consumer Installment and Other

Unallocated

Total

(In thousands)

Allowance for loan losses:

Individually evaluated for impairment

$

5,048

$

-

$

-

$

-

$

-

$

-

$

5,048

Collectively evaluated for impairment

3,279

3,330

152

1,330

7,980

4,835

20,906

Purchased loans with evidence of credit deterioration

-

-

-

-

-

-

-

Total

$

8,327

$

3,330

$

152

$

1,330

$

7,980

$

4,835

$

25,954

Carrying value of loans:

Individually evaluated for impairment

$

11,174

$

12,706

$

-

$

835

$

-

$

-

$

24,715

Collectively evaluated for impairment

343,494

528,957

2,555

86,889

365,236

-

1,327,131

Purchased loans with evidence of credit deterioration

29

508

-

-

328

-

865

Total

$

354,697

$

542,171

$

2,555

$

87,724

$

365,564

$

-

$

1,352,711

The Bank’s customers are small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Bank maintains a Loan Review Department which reports directly to the Board of Directors. The Loan Review Department performs independent evaluations of loans and assigns credit risk grades to evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” Loan Review Department evaluations occur every calendar quarter. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department examinations, assigned risk grades are re-evaluated promptly. Credit risk grades assigned by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.

The following summarizes the credit risk profile by internally assigned grade:

The following tables summarize loans by delinquency and nonaccrual status:

Summary of Loans by Delinquency and Nonaccrual Status

At September 30, 2017

Current and Accruing

30-59 Days Past Due and Accruing

60-89 Days Past Due and Accruing

Past Due 90 Days or More and Accruing

Nonaccrual

Total Loans

(In thousands)

Commercial

$

316,150

$

404

$

66

$

-

$

271

$

316,891

Commercial real estate

565,377

2,820

8

-

5,512

573,717

Construction

4,992

-

-

-

-

4,992

Residential real estate

69,124

-

-

-

-

69,124

Consumer installment and other

315,520

3,351

753

434

-

320,058

Total

$

1,271,163

$

6,575

$

827

$

434

$

5,783

$

1,284,782

Summary of Loans by Delinquency and Nonaccrual Status

At December 31, 2016

Current and Accruing

30-59 Days Past Due and Accruing

60-89 Days Past Due and Accruing

Past Due 90 Days or More and Accruing

Nonaccrual

Total Loans

(In thousands)

Commercial

$

353,497

$

966

$

40

$

-

$

194

$

354,697

Commercial real estate

533,377

1,460

445

-

6,889

542,171

Construction

2,329

226

-

-

-

2,555

Residential real estate

86,098

528

37

-

1,061

87,724

Consumer installment and other

360,549

3,288

989

497

241

365,564

Total

$

1,335,850

$

6,468

$

1,511

$

497

$

8,385

$

1,352,711

There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2017 and December 31, 2016.

The following summarizes impaired loans:

Impaired Loans

Impaired Loans

At September 30, 2017

At December 31, 2016

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance

(In thousands)

(In thousands)

With no related allowance recorded:

Commercial

$

1,246

$

1,308

$

-

$

1,234

$

1,303

$

-

Commercial real estate

12,726

14,817

-

13,233

15,610

-

Residential real estate

211

241

-

1,279

1,309

-

Consumer installment and other

169

276

-

569

675

-

Total with no related allowance recorded

14,352

16,642

-

16,315

18,897

-

With an allowance recorded:

Commercial

9,803

9,803

4,922

10,163

10,172

5,048

Commercial real estate

1,809

1,811

154

-

-

-

Total with an allowance recorded

11,612

11,614

5,076

10,163

10,172

5,048

Total

$

25,964

$

28,256

$

5,076

$

26,478

$

29,069

$

5,048

Impaired loans include troubled debt restructured loans. Impaired loans at September 30, 2017, included $12,365 thousand of restructured loans, $5,044 thousand of which were on nonaccrual status. Impaired loans at December 31, 2016, included $12,381 thousand of restructured loans, $5,302 thousand of which were on nonaccrual status.

[The remainder of this page intentionally left blank]

- 18 -

Impaired Loans

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016

Average

Recognized

Average

Recognized

Average

Recognized

Average

Recognized

Recorded

Interest

Recorded

Interest

Recorded

Interest

Recorded

Interest

Investment

Income

Investment

Income

Investment

Income

Investment

Income

(In thousands)

Commercial

$

11,125

$

130

$

12,858

$

126

$

11,203

$

366

$

13,454

$

394

Commercial real estate

14,681

208

14,486

188

14,826

669

17,991

549

Construction

-

-

-

-

-

-

136

-

Residential real estate

365

4

530

4

494

13

693

13

Consumer installment and other

340

3

545

6

466

17

435

18

Total

$

26,511

$

345

$

28,419

$

324

$

26,989

$

1,065

$

32,709

$

974

The following table provides information on troubled debt restructurings:

Troubled Debt Restructurings

At September 30, 2017

Period-End

Individual

Number of

Pre-Modification

Period-End

Impairment

Contracts

Carrying Value

Carrying Value

Allowance

($ in thousands)

Commercial

7

$

2,393

$

1,140

$

49

Commercial real estate

11

11,847

11,014

-

Residential real estate

1

241

211

-

Total

19

$

14,481

$

12,365

$

49

Troubled Debt Restructurings

At December 31, 2016

Period-End

Individual

Number of

Pre-Modification

Period-End

Impairment

Contracts

Carrying Value

Carrying Value

Allowance

($ in thousands)

Commercial

7

$

2,719

$

1,489

$

113

Commercial real estate

10

11,257

10,673

-

Residential real estate

1

241

219

-

Total

18

$

14,217

$

12,381

$

113

During the three and nine months ended September 30, 2017, the Company modified one loan with a carrying value of $50 thousand and four loans with a carrying value of $699 thousand, respectively, that were considered troubled debt restructurings. The four concessions granted in the first nine months of 2017 consisted of modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms. During the three and nine months ended September 30, 2016, the Company modified zero loans and four loans with a total carrying value of $4,843 thousand, respectively, that were considered troubled debt restructurings. The concessions granted in the four restructurings completed in the first nine months of 2016 consisted of three modifications of payment terms to extend the maturity date to allow for deferred principal repayment and under-market terms and one court order requiring under-market terms. During the three and nine months ended September 30, 2017, one troubled debt restructured loan with a carrying value of $58 thousand was charged off. There were no chargeoffs related to troubled debt restructurings made during the three and nine months ended September 30, 2016. During the three and nine months ended September 30, 2017 and 2016, no troubled debt restructured loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are ninety days or more past due.

There were no loans restricted due to collateral requirements at September 30, 2017 and December 31, 2016.

There were no loans held for sale at September 30, 2017 and December 31, 2016.

At September 30, 2017 and December 31, 2016, the Company held total other real estate owned (OREO) of $1,426 thousand net of reserve of $1,905 thousand and $3,095 thousand net of reserve of $1,816 thousand, respectively, of which $-0- thousand was foreclosed residential real estate properties or covered OREO at both dates. There were no consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process at September 30, 2017 and December 31, 2016.

- 19 -

Note 5: Concentration of Credit Risk

Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations: (a) unsecured loans shall not exceed 15 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank, or (b) secured and unsecured loans in all shall not exceed 25 percent of the sum of the shareholders' equity, allowance for loan losses, capital notes, and debentures of the bank. At September 30, 2017, Westamerica Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2017, Westamerica Bank had 38 lending relationships each with aggregate loans exceeding $5 million. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $58,046 thousand and $57,721 thousand at September 30, 2017 and December 31, 2016, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At September 30, 2017, Westamerica Bank held corporate bonds in 66 issuing entities that exceeded $5 million for each issuer.

Note 6: Other Assets

Other assets consisted of the following:

At September 30, 2017

At December 31, 2016

(In thousands)

Cost method equity investments:

Federal
Reserve Bank stock (1)

$

14,068

$

14,069

Other investments

159

201

Total cost method equity investments

14,227

14,270

Life insurance cash surrender value

53,459

51,535

Net deferred tax asset

49,514

55,417

Limited partnership investments

11,241

12,591

Interest receivable

20,776

21,489

Prepaid assets

3,969

4,825

Other assets

11,783

11,597

Total other assets

$

164,969

$

171,724

(1) A bank applying for membership in the Federal Reserve System is required to subscribe to stock in the Federal Reserve Bank (FRB) in its district in a sum equal to six percent of the bank’s paid-up capital stock and surplus. One-half of the amount of the bank's subscription shall be paid to the FRB and the remaining half will be subject to call when deemed necessary by the Board of Governors of the Federal Reserve System.

The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At September 30, 2017, this investment totaled $11,241 thousand and $2,299 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2016, this investment totaled $12,591 thousand and $2,299 thousand of this amount represented outstanding equity capital commitments. At September 30, 2017, the $2,299 thousand of outstanding equity capital commitments are expected to be paid as follows, $722 thousand in 2020, $131 thousand in 2023, $90 thousand in 2024 and $1,356 thousand in 2025 or thereafter.

The amounts recognized in net income for these investments include:

For the Three Months Ended

For the Nine Months Ended

September 30,

2017

2016

2017

2016

(In thousands)

Investment loss included in pre-tax income

$

450

$

675

$

1,350

$

2,025

Tax credits recognized in provision for income taxes

463

562

1,388

1,723

- 20 -

Note 7: Goodwill and Identifiable Intangible Assets

The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the three and nine months ended September 30, 2017 and year ended December 31, 2016. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three and nine months ended September 30, 2017 and year ended December 31, 2016, no such adjustments were recorded.

As of September 30, 2017, the current period and estimated future amortization expense for identifiable intangible assets was:

Merchant

Core

Draft

Deposit

Processing

Intangibles

Intangible

Total

(In thousands)

For the Nine Months ended September 30, 2017 (actual)

$

2,197

$

125

$

2,322

Estimate for the remainder of year ending December 31, 2017

716

39

755

Estimate for year ending December 31, 2018

1,892

29

1,921

2019

538

-

538

2020

287

-

287

2021

269

-

269

2022

252

-

252

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- 21 -

Note 8: Deposits and Borrowed Funds

The following table provides additional detail regarding deposits.

Deposits

At September 30, 2017

At December 31, 2016

(In thousands)

Noninterest-bearing

$

2,128,342

$

2,089,443

Interest-bearing:

Transaction

873,145

865,701

Savings

1,491,168

1,493,427

Time deposits less than $100 thousand

124,252

133,712

Time deposits $100 thousand through $250 thousand

79,614

84,925

Time deposits more than $250 thousand

38,059

37,533

Total deposits

$

4,734,580

$

4,704,741

Demand deposit overdrafts of $1,179 thousand and $2,679 thousand were included as loan balances at September 30, 2017 and December 31, 2016, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $103 thousand and $314 thousand for the three and nine months ended September 30, 2017, respectively and $124 thousand and $395 thousand for the three and nine months ended September 30, 2016, respectively.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale investment securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, impaired loans, certain loans held for investment, investment securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.

In accordance with the Fair Value Measurement and Disclosure topic of the Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. When the valuation assumptions used to measure the fair value of the asset or liability are categorized within different levels of the fair value hierarchy, the asset or liability is categorized in its entirety within the lowest level of the hierarchy. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury and equity securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

- 22 -

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes federal agency securities, mortgage-backed securities, corporate securities, asset-backed securities, and municipal bonds.

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company relies on independent vendor pricing services to measure fair value for investment securities available for sale and investment securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote closely affecting the market generally used as the fair value estimate. In addition, the Company conducts “other than temporary impairment (OTTI)” analysis on a quarterly basis; securities selected for OTTI analysis include all securities at a market price below 95 percent of par value. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair value estimates may not be realized in an actual sale of the securities.

The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3. When the Company changes its valuation assumptions for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, or reevaluates the valuation techniques and assumptions used by its vendors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new information. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the nine months ended September 30, 2017 and year ended December 31, 2016, there were no transfers in or out of levels 1, 2 or 3.

Assets Recorded at Fair Value on a Recurring Basis

The tables below present assets measured at fair value on a recurring basis on the dates indicated.

At September 30, 2017

Fair Value

Quoted Prices in Active Markets for Identical Assets(Level 1)

Significant Other Observable Inputs(Level 2)

Significant Unobservable Inputs(Level 3)

(In thousands)

Securities of U.S. Government sponsored entities

$

120,459

$

-

$

120,459

$

-

Agency residential MBS

739,218

-

739,218

-

Non-agency residential MBS

165

-

165

-

Agency commercial MBS

1,902

-

1,902

-

Securities of U.S. Government entities

1,769

-

1,769

-

Obligations of states and political subdivisions

179,501

-

179,501

-

FHLMC and FNMA stock

9,560

13

9,547

-

Corporate securities

1,036,089

-

1,036,089

-

Other securities

1,814

-

1,814

-

Total securities available for sale

$

2,090,477

$

13

$

2,090,464

$

-

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- 23 -

At December 31, 2016

Fair Value

Quoted Prices in Active Markets for Identical Assets(Level 1)

Significant Other Observable Inputs(Level 2)

Significant Unobservable Inputs(Level 3)

(In thousands)

Securities of U.S. Government sponsored entities

$

138,660

$

-

$

138,660

$

-

Agency residential MBS

691,499

-

691,499

-

Non-agency residential MBS

271

-

271

-

Securities of U.S. Government entities

2,025

-

2,025

-

Obligations of states and political subdivisions

183,411

-

183,411

-

Asset-backed securities

695

-

695

-

FHLMC and FNMA stock

10,869

17

10,852

-

Corporate securities

860,857

-

860,857

-

Other securities

2,471

656

1,815

-

Total securities available for sale

$

1,890,758

$

673

$

1,890,085

$

-

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at September 30, 2017 and December 31, 2016, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

For the

Nine Months Ended

At September 30, 2017

September 30, 2017

Carrying Value

Level 1

Level 2

Level 3

Total Losses

(In thousands)

Other real estate owned

$

1,426

$

-

$

-

$

1,426

$

(219

)

Impaired loans

10,821

-

-

10,821

-

Total assets measured at fair value on a nonrecurring basis

$

12,247

$

-

$

-

$

12,247

$

(219

)

For the

Year Ended

At December 31, 2016

December 31, 2016

Carrying Value

Level 1

Level 2

Level 3

Total Losses

(In thousands)

Other real estate owned

$

3,095

$

-

$

-

$

3,095

$

(705

)

Impaired loans

9,525

-

-

9,525

-

Total assets measured at fair value on a nonrecurring basis

$

12,620

$

-

$

-

$

12,620

$

(705

)

Level 3 – Valuation is based upon present value of expected future cash flows, independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. Level 3 includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been established or a chargeoff has been recorded. Losses on other real estate owned represent losses recognized in earnings during the period subsequent to its initial classification as foreclosed assets. The unobservable inputs and qualitative information about the unobservable inputs are not presented as the inputs were not developed by the Company.

- 24 -

Disclosures about Fair Value of Financial Instruments

The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value in the balance sheet.

Cash and Due from Banks Cash and due from banks represent U.S. dollar denominated coin and currency, deposits at the Federal Reserve Bank and correspondent banks, and amounts being settled with other banks to complete the processing of customers’ daily transactions. Collectively, the Federal Reserve Bank and financial institutions operate in a market in which cash and due from banks transactions are processed continuously in significant daily volumes honoring the face value of the U.S. dollar.

Investment Securities Held to Maturity The fair values of investment securities were estimated using quoted prices as described above for Level 2 valuation.

Loans Loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates were valued using historical cost. Fixed rate loans and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of $23,628 thousand at September 30, 2017 and $25,954 thousand at December 31, 2016 was applied against the estimated fair values to recognize estimated future defaults of contractual cash flows. The Company does not consider these values to be a liquidation price for the loans.

Deposit Liabilities Deposits with no stated maturity such as checking accounts, savings accounts and money market accounts can be readily converted to cash or used to settle transactions at face value through the broad financial system operated by the Federal Reserve Bank and financial institutions. The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair values of time deposits were estimated by discounting estimated future contractual cash flows using current market rates for financial instruments with similar characteristics.

Short-Term Borrowed Funds The carrying amount of securities sold under agreement to repurchase and other short-term borrowed funds approximate fair value due to the relatively short period of time between their origination and their expected realization.

The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled in larger quantities. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.

The Company has not included assets and liabilities that are not financial instruments, such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company.

At September 30, 2017

Carrying Amount

Estimated Fair Value

Quoted Prices in Active Markets for Identical Assets(Level 1)

Significant Other Observable Inputs(Level 2 )

Significant Unobservable Inputs(Level 3 )

Financial Assets:

(In thousands)

Cash and due from banks

$

561,757

$

561,757

$

561,757

$

-

$

-

Investment securities held to maturity

1,204,240

1,208,279

-

1,208,279

-

Loans

1,261,154

1,264,503

-

-

1,264,503

Financial Liabilities:

Deposits

$

4,734,580

$

4,731,990

$

-

$

4,492,655

$

239,335

Short-term borrowed funds

66,337

66,337

-

66,337

-

- 25 -

At December 31, 2016

Carrying Amount

Estimated Fair Value

Quoted Prices in Active Markets for Identical Assets(Level 1)

Significant Other Observable Inputs(Level 2 )

Significant Unobservable Inputs(Level 3 )

Financial Assets:

(In thousands)

Cash and due from banks

$

462,271

$

462,271

$

462,271

$

-

$

-

Investment securities held to maturity

1,346,312

1,340,741

-

1,340,741

-

Loans

1,326,757

1,337,774

-

-

1,337,774

Financial Liabilities:

Deposits

$

4,704,741

$

4,702,797

$

-

$

4,448,571

$

254,226

Short-term borrowed funds

59,078

59,078

-

59,078

-

The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.

Note 10: Commitments and Contingent Liabilities

Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $307,269 thousand and $304,508 thousand at September 30, 2017 and December 31, 2016, respectively. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled $19,956 thousand and $21,732 thousand at September 30, 2017 and December 31, 2016, respectively. The Company had no commitments outstanding for commercial and similar letters of credit at September 30, 2017 and December 31, 2016. The Company had a reserve for unfunded commitments of $2,308 thousand at September 30, 2017 and $2,408 thousand at December 31, 2016, included in other liabilities.

Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated.

The Company has determined that it will be obligated to provide refunds of revenue recognized in prior years to some customers. The Company is not yet able to quantify the amount of refunds and has therefore not accrued a liability. The Company will provide additional information and accrue a liability when a determination of the probable amount of these obligations is made.

The October 2017 California wildfires have disrupted operations in the Company's geographic footprint mainly due to temporary power outages, unhealthy air quality, and evacuations affecting some branches and an operations center. The Company maintains secondary power generation capability at its principal operations center. The Company maintains, and regularly tests, disaster recovery plans and protocols to be prepared for disasters such as these wildfires. The Company has not experienced a casualty loss as of the date of this report, but does carry customary casualty insurance to protect against such risk.

Management has performed an initial evaluation of loss exposure caused by the wildfires within the Company's loan portfolio and investment portfolio; Management has not identified any increased risk of loss, however, continuing Management evaluations and further wildfire developments could result in identification of losses which are not currently apparent.

- 26 -

Note 11: Earnings Per Common Share

The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period plus the impact of common stock equivalents.

For the Three Months

For the Nine Months

Ended September 30,

2017

2016

2017

2016

(In thousands, except per share data)

Net income applicable to common equity (numerator)

$

15,017

$

15,628

$

45,865

$

44,400

Basic earnings per common share

Weighted average number of common shares outstanding - basic(denominator)

26,309

25,641

26,260

25,558

Basic earnings per common share

$

0.57

$

0.61

$

1.75

$

1.74

Diluted earnings per common share

Weighted average number of common shares outstanding - basic

26,309

25,641

26,260

25,558

Add common stock equivalents for options

95

46

119

37

Weighted average number of common shares outstanding - diluted(denominator)

26,404

25,687

26,379

25,595

Diluted earnings per common share

$

0.57

$

0.61

$

1.74

$

1.73

For the three and nine months ended September 30, 2017, options to purchase 376 thousand and 343 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

For the three and nine months ended September 30, 2016, options to purchase 771 thousand and 948 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted net income per share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.

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- 27 -

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

WESTAMERICA BANCORPORATION

FINANCIAL SUMMARY

For the Three Months

For the Nine Months

Ended September 30,

2017

2016

2017

2016

(In thousands, except per share data)

Net Interest and Loan Fee Income (FTE)(1)

$

35,680

$

36,176

$

107,474

$

109,118

Reversal of Provision for Loan Losses

-

(3,200

)

(1,900

)

(3,200

)

Noninterest Income

12,548

11,598

36,328

35,029

Noninterest Expense

24,114

26,088

73,125

77,175

Income Before Income Taxes (FTE)(1)

24,114

24,886

72,577

70,172

Income Tax Provision (FTE)(1)

9,097

9,258

26,712

25,772

Net Income

$

15,017

$

15,628

$

45,865

$

44,400

Average Common Shares Outstanding

26,309

25,641

26,260

25,558

Average Diluted Common Shares Outstanding

26,404

25,687

26,379

25,595

Common Shares Outstanding at Period End

26,319

25,665

Per Common Share:

Basic Earnings

$

0.57

$

0.61

$

1.75

$

1.74

Diluted Earnings

0.57

0.61

1.74

1.73

Book Value

$

22.95

$

21.94

Financial Ratios:

Return on Assets

1.09

%

1.18

%

1.13

%

1.14

%

Return on Common Equity

9.94

%

11.39

%

10.36

%

11.04

%

Net Interest Margin (FTE)(1)

3.10

%

3.21

%

3.12

%

3.27

%

Net Loan Losses (Recoveries) to Average Loans

0.15

%

(0.19

%)

0.04

%

0.02

%

Efficiency Ratio(2)

50.0

%

54.6

%

50.9

%

53.5

%

Average Balances:

Assets

$

5,441,612

$

5,253,502

$

5,407,661

$

5,204,418

Earning Assets

4,587,848

4,489,317

4,601,931

4,448,261

Loans

1,287,740

1,386,186

1,325,128

1,447,061

Deposits

4,714,579

4,588,762

4,692,330

4,552,819

Shareholders' Equity

599,473

545,771

591,691

537,010

Period End Balances:

Assets

$

5,445,808

$

5,306,778

Earning Assets

4,579,499

4,537,756

Loans

1,284,782

1,364,329

Deposits

4,734,580

4,644,870

Shareholders' Equity

603,957

562,996

Capital Ratios at Period End:

Total Risk Based Capital

16.71

%

15.16

%

Tangible Equity to Tangible Assets

8.98

%

8.37

%

Dividends Paid Per Common Share

$

0.39

$

0.39

$

1.17

$

1.17

Common Dividend Payout Ratio

68

%

64

%

67

%

68

%

The above financial summary has been derived from the Company's unaudited consolidated financial statements. This information should be read

in conjunction with those statements, notes and the other information included elsewhere herein. Percentages under the heading "Financial Ratios"

are annualized with the exception of the efficiency ratio.

(1) Yields on securities and certain loans have been adjusted upward to a "fully taxable equivalent" ("FTE") basis in order to reflect the effect of income which is exempt from federal income taxation at the current statutory tax rate.

(2) The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income on an FTE basis and noninterest income).

- 28 -

Financial Overview

Westamerica Bancorporation and subsidiaries’ (the “Company”) principal source of revenue is net interest and loan fee income, which represents interest and fees earned on loans and investment securities (“earning assets”) reduced by interest paid on deposits and other borrowings (“interest-bearing liabilities”). Market interest rates declined considerably following the recession of 2008 and 2009. Interest rates remained historically low through 2016 as the Federal Open Market Committee’s (“FOMC”) monetary policy was highly accommodative. During this period, Management avoided originating long-dated, low-yielding loans given the potential impact of such assets on forward earning potential; as a result, loans declined and investment securities increased. The changing composition of the earning assets and low market interest rates has pressured the net interest margin to lower levels. The FOMC’s first post-recession increase in the federal funds rate occurred in December 2015, although longer-term rates declined. The FOMC’s successive post-recession increases in the federal funds rate occurred between December 2016 and June 2017, although longer-term rates have not increased by a similar magnitude. The more recent increase in rates has resulted in competitive loan yields which are more appealing from a profitability perspective, in Management’s opinion.

The funding of the Company’s earning assets is primarily customer deposits. The Company’s long-term strategy includes maximizing checking and savings deposits as these types of deposits are lower-cost and less sensitive to changes in interest rates compared to time deposits. The first nine months of 2017 average volume of checking and savings deposits was 95 percent of average total deposits.

The Company recognized a reversal of the provision for loan losses of $1.9 million in the first nine months of 2017. Credit quality improved during the first nine months of 2017 with nonperforming assets declining $4 million to $8 million at September 30, 2017. The Company’s net losses were $426 thousand for the first nine months of 2017. These developments were reflected in Management’s evaluation of credit quality, the level of the provision for loan losses, and the adequacy of the allowance for loan losses at September 30, 2017.

The Company’s long-term strategy also includes controlling operating costs, or “noninterest expense.” Noninterest expense of $73.1 million for the first nine months of 2017 was $4.1 million lower than for the first nine months of 2016.

The Company presents its net interest margin and net interest income on an FTE basis using the current statutory federal tax rate. Management believes the FTE basis is valuable to the reader because the Company’s loan and investment securities portfolios contain a relatively large portion of municipal loans and securities that are federally tax exempt. The Company’s tax exempt loans and securities composition may not be similar to that of other banks. Therefore in order to reflect the impact of the federally tax exempt loans and securities on the net interest margin and net interest income for comparability with other banks, the Company presents its net interest margin and net interest income on an FTE basis.

The Company’s significant accounting policies (see Note 1 (“Summary of Significant Accounting Policies”) to Financial Statements in the Company’s 2016 Form 10-K) are fundamental to understanding the Company’s results of operations and financial condition. The Company adopted the FASB ASU 2016-09,Improvements to Employee Share-Based Payment Accounting effective January 1, 2017.

The Company reported net income of $15.0 million or $0.57 diluted earnings per common share for the third quarter 2017 and net income of $45.9 million or $1.74 diluted earnings per common share for the nine months ended September 30, 2017. Second quarter 2017 results included a $1.9 million reversal of provision for loan losses which accounted for $0.04 of the quarter’s diluted earnings per common share. Third quarter and first nine months of 2017 results reflect the Company’s prospective adoption of ASU 2016-09; first quarter 2017 diluted earnings per common share measured $0.02 higher than would have been measured under accounting standards applied in 2016. The adoption of ASU 2016-09 did not affect second or third quarter 2017 results by a meaningful amount. Third quarter and first nine months of 2017 results compare to net income of $15.6 million or $0.61 diluted earnings per common share for the third quarter 2016 and net income of $44.4 million or $1.73 diluted earnings per common share for the nine months ended September 30, 2016.